The Glass Is Half-Empty

JONES SODA'S BLACK CHERRY is a refreshing soft drink, gently sweet and effervescent. But it can't compete in the fizz department with the company's stock.

Jones
(ticker: JSDA) shot up 256%, to 32, from August through mid-April, on speculation about a strong fourth-quarter, takeover rumors and covering by short sellers, who still hold about 20% of the company's publicly traded shares. Even at Friday's 21.24, the stock trades for 170 times 2006 earnings of 13 cents a share, and 120 times analysts' 2007 estimates of 17 cents a share. That compares with price-earnings multiples in the mid-to-high teens for
Coca-Cola
(KO),
PepsiCo
(PEP) and
Hansen Natural
(HANS), the trendy maker of Monster energy drinks. Affix a generous P/E of 20 to Wall Street's '08 consensus estimate of 33 cents a share, and Jones would be valued at 7, some 65% below its current price.

A marketer of pricey concoctions with names like FuFu Berry and Whoopass, Jones also seems frothy when measured by price to sales. Pepsi bought SoBe, the New Age beverage company, for 2.5 times sales, and Coke paid about the same multiple for Fuze Beverage. Jones, on the other hand, fetches 13 times sales. These deals also mean that investors who pinned their hopes on a buyout are likely to be disappointed, at least in the near term.

Jones' founder and CEO, Peter van Stolk, 43, tells Barron's he's not interested in selling the company. But van Stolk and other insiders have taken advantage of the stock's run-up to sell shares in recent months. So, too, has Thomas Barry of the Bjurman Barry Small Cap Growth Fund (BBSFX), which unloaded its entire one-million-share stake earlier this year. "I'd be nervous buying the stock at these P/E levels with the earnings and revenue they've had," says Barry, citing Jones' flat first-quarter profits and less-than-expected uptick in sales.

Granted, Wall Street sees whoopass growth for Jones, based in part on this weekend's national rollout of a cane-sugar-sweetened soda. The Seattle company is expected to net $5 million in 2007 on revenue of $56 million, and $9 million in 2008 on revenue of $74 million. But these gains, and then some, arguably are reflected in its shares.

The Bottom Line

If Jones Soda were to trade for 20 times earnings, just above the industry norm, its shares would be valued at 7, not today's 21.50.

Jones sells 21 flavors of soda and a variety of energy and organic beverages. To win coveted shelf space the company markets its brand as a "healthier alternative" to regular pop, and highlights the move to sweeten its beverages with cane sugar instead of high-fructose corn syrup. Though there is no medical evidence to support the "healthier" claim for sugar, that hasn't derailed van Stolk's bid to make Jones the "premier soft drink in the U.S."

At $1.65 a bottle, Jones might succeed in expanding its cult following. But it won't dethrone Coca-Cola and PepsiCo, which together control more than 70% of the carbonated-soft-drink market. Beverage Digest reported late last year that Pepsi might launch cane-sugar versions of Sierra Mist and possibly other products this year. PepsiCo officials didn't return our calls.

As for other initiatives, Jones agreed last year to sell concentrate to National Beverage, a soft-drink distributor. Stifel Nicolaus analyst Mark Astrachan expects concentrate sales to chip in 27% of the roughly $58 million in revenue he's projecting for this year. Jones also switched to cans from bottles to ease its distribution in mainstream retail outlets such as Wal-Mart and Pathmark.

Van Stolk founded Jones in 1987 as a beverage distributor in Canada. He launched his own brands in 1995. While his efforts to peddle the beverages out of sex shops and tattoo parlors turned heads, they failed to generate consistent profits until 2003.

Nor are the company's growing pains over, as its first-quarter results attest. In a report last month, Luke Braly, an analyst who recently resigned from research firm Glass Lewis, noted Jones sold concentrate to National Beverage in the fourth quarter of 2006, well ahead of the peak April-September selling season. Therefore, sales that would have boosted spring and summer results were recognized last year. "The quicker revenue recognition may not be reflected in sell-side analysts' 2007 revenue projections, creating the potential for an earnings miss," Braly said.

Like its founder, Jones may stay ebullient for awhile. But analysts have been slicing their estimates, and the stock already has lost some fizz. One of Jones' funkier flavors is Turkey & Gravy soda. In time, that also could prove a fit description of its shares.

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